Earlier in the month I wrote about how much money US frequent flyer programs have earned so far this year. While offering some caveats, one analyst’s figures are as follows:
|Airline||Marketing Revenue Jan-June 2018||Year-Over-Year Increase|
|American Airlines||$1.15 billion||10%|
|United Airlines||$962 million||12%|
|Delta Air Lines||$805 million||12%|
|Southwest Airlines||$563 million||14%|
|Alaska Airlines||$215 million||3%|
|JetBlue Airways||$80 million||23%|
|Hawaiian Airlines||$34 million||53%|
There’s no need to do back of the envelope with Qantas, in fact Qantas shares real numbers about its frequent flyer program. During fiscal year 2018:
- $272 million profit (up 1%)
- 24.1% margin (down from 24.5%)
- Qantas points-earning cards issued grew by 7%
- 12.3 million program members (up 4.2%, their Woolworths partnership is a driver)
The biggest thing that holds down profit at Qantas is interchange regulation. Rewards credit cards aren’t as lucrative.
In 2002 the Reserve Bank of Australia introduced new credit card processing rules – starting in 2003 (1) interchange fees on four party card networks (i.e. Visa and MasterCard) were capped and (2) merchants were allowed to pass these fees on to consumers. The goal was to get consumers to use cards less by reducing rewards incentives.
Interchange – merchant swipe fees – fell by 50%. Annual fees grew, issuers capped the rewards you could earn on many cards (thus encouraging consumers to switch cards when they hit the cap). Consumers moved to debit cards and American Express cards which initially weren’t covered by the cap.
Source: Reserve Bank of Australia
It doesn’t take much to extrapolate out to programs 8 times the size in the U.S. and with greater margins on credit card business, suggesting that the estimates for US programs seem order of magnitude reasonable. It’s also no coincidence that Qantas devalued in a huge way a year after interchange regulation went into place. Instead of offering, say, half as many miles per dollar on credit card spend they started just charging twice as many miles for many awards (though in some cases more).
Credit card interchange regulation in the U.S. would probably mean just less lucrative earn for future spend, but devaluation of existing points balances. Perhaps just as much of a risk is that the same effect could be driven by new payment technologies which compete down interchange rates.